The importance of Supply Chain Risk Monitoring

21 February 2017 2:46pm

In a globalised business environment characterised by increasingly complex supply chains, companies need to monitor a wide range of sources to detect warning signs of supplier risk before they cause legal, financial or reputational damage. This article identifies some of the biggest risks to companies and the best way to monitor those risks.

What types of risk require adverse news monitoring?

Companies that operate globally face a wide range of risk. According to the Executive Perspectives on Top Risks for 2017, an annual survey conducted by North Carolina State University's Enterprise Risk Management Initiative, reveals that global boards of directors and C-suite executives see their risk exposure growing. The study's authors write, "Pressures from boards, volatile markets, intensifying competition, demanding regulatory requirements, fear of catastrophic events and other dynamic forces are leading to calls for management to design and implement effective risk management capabilities to identify and assess the organization's key risk exposures, with the intent of reducing them to an acceptable level." The first step therefore is to understand the types of risk you face to better protect your company's interests. Here are four types of risk to consider.

Reputational—We have seen brand reputations rise—or fall—as a result of actions taken by the parent company or the third parties it relies on. Unsafe working conditions in a garment factory in Bangladesh or slave labour on fishing boats around Southeast Asia can translate to reputational damage, consumer boycotts and even class-action lawsuits—especially in the age of viral social media. As a result, companies need greater visibility into potentially damaging practices to address the concerns of investors, board members and consumers.

Regulatory—The regulatory landscape continues to evolve as governments around the world target bribery and corruption, money laundering, and terrorist financing. Last year's Panama Papers revelations only increased the pressure, ensuring renewed vigour in efforts to bring transparency to beneficial ownership. Any doubt that regulators are easing up can certainly be discounted give the record-setting FCPA enforcement actions of 2016.

Financial—While companies typically vet suppliers and other critical third parties using conventional credit scores, the threat of financial risk extends beyond on-boarding. Companies need to stay alert to product failures, pending litigation, pricing violations and other issues that can disrupt supply chains and lead to financial and reputational damage.

Strategic—Risk and reward go hand-in-hand, so companies must constantly watch for emerging opportunities while improving awareness into factors that can disrupt progress toward strategic goals. These risks including work shortages, natural disasters, geopolitical instability and cybersecurity breaches.

Failing to anticipate the above risks—regardless of whether they occur within an organization or anywhere in the extended supply chain and third-party networks can lead to reputational damage, enforcement actions by regulators, declining revenues and share prices and hampered growth. And given the increasingly global and fragmented nature of these networks, it has become more difficult to monitor for risk.

How can companies improve risk monitoring?

A company's ability to monitor its supply chain for risk depends on access to comprehensive and credible information on its suppliers. In addition to credit risk scoring, companies need to expand risk monitoring to encompass news, legal judgements, geographic regions and industries in which they and their suppliers operate. Capturing insights from fragmented collections of sources is inefficient and ineffective; companies need a more proactive approach to spot threats more quickly.

Traditional search engines allow companies to search a range of sources for mentions of its suppliers instantly. But this information is not always timely, reliable or comprehensive. Companies are better served with curated, premium global content, including media outlets, industry and trade journals, legal and regulatory publications, and business journals that is often unavailable on the open web and not covered by self-reported data from suppliers and other third parties.

Technology allows for a risk-based approach to monitoring

Improvements in technology allow companies to monitor these sources more effectively. Supply chain management and risk professionals often rely on manual searches through multiple sources for mentions of their suppliers and critical third parties. The costly, time-intensive process must be repeated on a daily basis to provide an up-to-date picture of a company's risk profile.

A more proactive approach leverages technology to allow a company to enter the names of hundreds of suppliers, consistently check them against the relevant sources, flag any indicators of heightened risk, based on industry-standard PESTLE analysis that considers risk within the context of Political, Economic, Socio-cultural, Technological, Legal and Environmental factors. Whenever a new mention of a company surfaces, its risk score can be updated and shared via an Alert or RSS feed to key stakeholders, ensuring that decision makers are empowered with actionable insights.